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Monday, August 5, 2013

Cosco Corporation : The great famine (CIMB)

Cosco Corporation
The great famine
S$0.75 –
Tgt. S$0.46

▊ We were spot on with 2Q13 net profit of S$12m, although this was helped by S$2.4m tax income, without which, it would have been an ugly set of results. We expect a consensus downgrade of earnings and target prices as Cosco continues to disappoint. 2Q13 net profit met our expectation with 1H13 accounting for 46% of our FY13 forecast but grossly below consensus at only 29%. Maintain Underperform with a target price still based on 22x CY14 P/E (5-year mean). De-rating catalysts are 55% yoy earnings deterioration in FY13. We doubt that the market will be excited by the contract announcements of a US$170m rig jack-up order and Rmb590m offshore supply vessels.

Offshore contributes, shipbuilding at an end
1H13 revenue was in line with our expectation, accounting for 49% of our FY13 forecast. The offshore segment, which contributed 70% of the group’s revenue, registered 31% qoq and 52% yoy growth thanks to more project execution. Shipbuilding shrank by 14% qoq and 69% yoy? as its order book dwindled with only 14 deliveries in 1H13 (20 in 1H12). Ship repair grew by 34% qoq but was down 33% yoy.

Declining margin outlook
2Q13 gross margin remained stable at 10.7% (1Q13: 10.7%), which could be helped by higher volumes from ship repair (higher gross margin of 15%). However, we noticed a downward trend in margins and the company’s guidance across all segments (Figure 1). In 2012, shipbuilding and offshore margins were in the range of 9-11% but have since dropped to 7-9% in 2Q13. Management expects margins for shipbuilding projects to be under pressure due to low contract values secured since 2010, despite an improvement in efficiency. Similarly, management foresees technical challenges and higher costs for new product types in offshore.

Contract wins, so what?
It takes more than contract wins to gain confidence from the market, in our view. Its order book stood at US$6.7bn as at end-June. YTD order wins amounted to c.US$1.2bn, in line with our US$2bn FY13 target.

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